Decentralised finance

Quick definition

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Jan 20, 2023

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Decentralised finance, also known as “DeFi,” refers to financial services that operate on public blockchains.

Key details

• DeFi requires no third party or centralised authority to operate and offers many features of traditional finance, like lending/borrowing and trading.
• DeFi products utilize smart contracts that define how DeFi products operate and work.
• DeFi can be used anonymously but DeFi “wallets,” which are automatically assigned a user ‘address’, are needed to hold assets and operate decentralised applications.

What is Decentralised Finance?

Decentralised Finance (DeFi) are financial products on the blockchain that operate without a centralised authority. In DeFi, it’s possible to take a loan, buy coins, go long or short, trade an asset peer to peer, bid on items and more without overhead third parties or centralised authorities. 

DeFi is able to operate without third parties thanks to “smart contracts” that automatically execute orders and demands for users that interact with DeFi products. Smart contracts are able to create stable rules for each DeFi service and how that service should be used.

Unlike traditional finance (TradFi), DeFi operates globally 24/7. Anyone with a DeFi wallet and an internet connection can interact with DeFi products freely. This makes financial services more inclusionary and available to people who would not usually have access to them. 

What’s the difference between DeFi and TradFi?

TradFi refers to the conventional financial world, run by financial institutions and banking associations. When compared to DeFi, TradFi is highly centralised and controlled by financial regulators, banks, and the government.

Unlike DeFi, TradFi does not have transparent order books and most financial information relating to companies and institutions is not made available to the public. In DeFi, anything that occurs is publicly viewable; from small transactions to the code used to create dApps.

There are many actions that are possible in DeFi that are not available using TradFi, such as flash loans, 24/7 trading, accessible low trading fees and more.

What’s the difference between DeFi and CeFi?

CeFi stands for centralised finance. CeFi includes most of the abilities of DeFi but provides variations of extra security and accessibility for users who want less risk involved when using DeFi products.

Being a decentralised network with no authority or regulation means DeFi is prone to malicious activity and programming bugs. CeFi aims to curtail the issues of security and usage difficulty while keeping the core concepts of DeFi available to a wider audience. In CeFi it’s possible to lend and borrow assets, trade crypto coins, and use credit cards with crypto rewards.

Examples of CeFi include websites like Binance, Coinbase and Crypto.com where users must create accounts following know-your-customer (KYC) guidelines to gain access to centralised exchanges, centralised wallets, crypto credit cards, centralised yields and more. 

What are some DeFi examples?

DeFi is made up of many products with various use cases and distinctive prospects. Below are three popular DeFi products and what their use cases are:

• Yearn Finance. yearn.finance allows users to deposit cryptocurrencies into automatic lending and trading products. Two of the products include “Vaults”, which utilise various investment strategies to generate profitable returns for users, and “Iron Bank”, which allows users to borrow other cryptocurrencies by using their crypto as collateral.
• Chainlink. Allows external data from the outside world and internal data from the blockchain to be sent and received to various products, individuals, databases and more.
• Ripple/XRP. A digital payment network, exchange and remittance service that uses its cryptocurrency XRP for payments and as an intermediate currency for other currencies tradable on the network.

Where can I learn more?

If you’d like to learn more about DeFi and the products mentioned in this article, visit our hub page. To learn more about cryptocurrencies and what they do, take a look at our available courses or head over to the investing hub.